Slow Growth and Sluggish Manufacturing in Indonesia’s Less Competitive Provinces: A Geweke Causality Analysis

Abstract

This article presents a causality analysis of lagging economic growth in two Indonesian provinces: East Nusa Tenggara and North Maluku. We identify three variables which stand out for some of Indonesia’s economically challenged provinces: consistently low gross domestic product (GDP) growth, low levels of manufacturing, and under-utilisation of labour. Using Geweke causality analysis, we identify and measure the direction of causal effects between these variables. Our empirical findings confirm that output growth is affected by the level of value addition in economic activities and the productivity of human resources. We find that both the secondary sector’s contribution to gross regional development product (GRDP) and labour productivity contribute to the changes in overall provincial GRDP, but not the other way around. Such findings suggest that development in Indonesia’s economically challenged provinces would benefit greatly from expansion of appropriate manufacturing and value added activities, and more productive utilization of labour force in full employment situations.